In a line “one size does not fit all”
For details, just keep reading for a minute or two.
Purpose and audience of a particular information is key in determining its materiality level.
As an example, 0.5 or 1% of revenue is material in the context of financial statements being reported to the shareholders.
We can use the same yardstick when it comes to what to report under sustainability or ESG i.e. determining the “audience” and “purpose”
Are current and potential investors the relevant audience in this context?
The short answer is NO – people of the planet – as to how you operate somewhere in US or China may have an impact on people living thousands of miles away. Hence, as a corporate citizen of this globe one holds the responsibility of letting people know about the mode of their operations and the impact it has on the environment and communities.
Second, purpose of the information.
To answer this one, let’s first see where we stand in terms of the evolving regulatory reporting requirements related to sustainability.
International Sustainability Standards Board (ISSB) is currently tasked with developing a unified set of standards for sustainability reporting across the globe.
ISSB’s view on this topic is subject to discussion and lot of introspection where they say report if it has a material impact on the enterprise value. That is the purpose from their point of view
Let’s analyze whether it’s the rightful purpose.
If there was a realization that dealing negatively with the planet and people in and around organizations would ultimately have a negative material impact on company’s financials as well, then as a global community we would not have been standing where we are right now as financials is something very dear to us all.
All these regulations and standards are now making their mark because entities did not have that realization.
Suddenly expecting them to acknowledge carbon emissions, waste management, workplace environment etc as factors that impact the enterprise value is a very optimistic expectation to say the least.
Enterprise value is essentially the present value of future cash flows based on some expectations and estimations. If neither the company, nor their potential investors in the geography in which they operate care about ESG factors what would make them a) think that it impacts the enterprise value and b) report the same considering it material. For clarity, these matters would ultimately have a negative impact on the company’s value; question is whether the Management, Board and potential investors also think like that.
The primary focus must be to report as to where an entity stands in terms of the impact it is making to the planet and what actions have been taken to improvise. From that perspective, yes, for certain entities carbon emissions may be a material topic but not the Water stress depending upon the industry they operate within.
Putting enterprise value at the Centre of reporting is equivalent to taking a very inward and capitalistic view, hence efforts should be made to evolve it further for the betterment of generations to come.